Hopes Fall for Oil-Rig Suppliers

By THOMAS C. HAYES, Special to the New York Times

Published: December 30, 1987

DALLAS, Dec. 29—
After three years of staggering losses, executives in the oilfield service industry thought that the worst was finally over last summer. Oil prices went as high as $22 a barrel and exploration for new oil in the United States began to accelerate, increasing the demand for the drilling rigs, casing, pipe and other equipment and services needed to find and produce new reserves.

Further helped by a surge in foreign orders, many members of the industry - including Schlumberger Ltd., the Halliburton Company and Dresser Industries - returned to the black. And many executives were confidently predicting that a $10 billion reduction in operating costs since 1985 would enable the industry as a whole to turn a profit in 1988. A Sudden Reversal

Now these executives are not so certain. The hopes that better days were at hand dwindled a couple of weeks ago, when oil prices suddenly slumped after OPEC could not persuade all its members to go along with a plan to limit their production.

For instance, the price of the American benchmark crude oil, West Texas Intermediate, dropped by more than $4, to below $15 a barrel. And although it now sells for just under $17, that is still below the $19 of four weeks ago.

Even if oil prices average only $15 a barrel next year, the oilfield service industry stands to break even, many in the industry say. That is partly because of belt tightening, bankruptcies of some competitors and consolidations among others over the past two years. For example, Baker Hughes Inc., a company formed by the merger last April of Baker International Inc. and the Hughes Tool Company, says it has reduced its annual operating costs by $85 million by cutting its staff and achieving other economies of scale.

With oil at $15 a barrel, the number of rigs used to drill for new oil in the United States - a key barometer of the industry's health - would average about 950 in 1988, according to the American Petroleum Institute, a trade group.

A comparison with 1987 figures reflects the industry's progress in lowering costs and narrowing losses. This year, when the drilling-rig average was 936, or only 14 below the projected break-even average for next year, the 95 public companies in the industry lost 4 cents on every dollar of sales, according to estimates by Simmons & Company International, a Houston investment bank. (Collectively, these companies have lost $11.4 billion in the past three years, Simmons said.) Should oil prices rebound to $18 a barrel next year, the number of rigs would probably average 1,100 to 1,200. The total in operation last Monday was 1,145, still close to the year's peak of 1,181 two weeks ago and far above the low of 744 on May 10. While the $18-a-barrel figure would still be way below the peak of 4,500 in 1981, it would be high enough for most companies in the industry to make money. Lower Prices Seen

But rather than expecting prices to return to $18 a barrel, some energy analysts and officials of the Organization of Petroleum Exporting Countries say overproduction by the cartel's members makes it more likely that prices will sink to as low as $12 within a few months. ''We expect prices to soften in late January and February, to around $12 or $13, and stay there for some period,'' said Dennis Eklof, a director of Cambridge Energy Research Associates, a consulting concern in Cambridge, Mass.

If prices average $15 a barrel or less into the summer, another wave of consolidation, through mergers and joint ventures, will probably sweep the industry, analysts and executives predict. Many energy experts fear that the damage from such a contraction would outweigh the gains.

Indeed, the industry already could not supply the exploration equipment and services that would be required to find enough new oil to keep the nation's dependence on oil imports from rising. Imports now supply about 40 percent of the oil consumed in the United States, and about 2,500 rigs, or more than twice the number in operation, would have to be drilling for new oil just to maintain the status quo, most experts agree.

At the moment, however, the question of whether the industry could support such an exploration level is academic. Most experts agree that exploration will not increase significantly until oil sells for $25 a barrel for a sustained period. Signs of a Weaker Industry

Still, the signs of the industry's weakened state are already evident. Richard L. Kinchelow, a senior vice president at Enserch Exploration Inc., a Dallas-based exploration and production company, said the performance of the oilfield service companies he hires ''is acceptable, but down.'' Many have not kept their equipment in good shape, he said.

Moreover, many analysts and some executives fear that the quality of equipment and service will deteriorate further because the industry cannot attract the capital it needs to maintain existing equipment and to develop new products.

The oilfield service industry will have to become solidly profitable before the situation is reversed, and that prospect ''looks like a fairy-tale land right now,'' said Matthew Simmons, president of the investment bank that bears his name. ''The industry can't sustain itself as it is.'' Supplies Could Tighten

Analysts and executives say it would take the industry a minimum of six months and possibly more than a year to gear up to support a healthy rate of drilling - at least 2,000 rigs in operation.